• Sean Mills

Tobacco Bonds Are Blood Money


Blood money (noun): money obtained at the cost of another's life.


It’s a dark phrase dripping with connotations, often used to imply profiting from a tragedy or a killing. To accuse someone of taking “blood money” is a grave charge (no pun intended) to leverage. With that disclaimer, our politicians love exactly this kind of payment. They also need Americans to die so they can continue to collect.


This is allowed to continue only because they think you don’t know about this disgusting practice. Here’s how politicians line the pockets of investors with cash by profiting from the deaths of our families, friends, and neighbors.


The Master Settlement Agreement


Beginning in 1994, courts were becoming packed with litigation against tobacco companies by state attorneys general over the negligence and fraud perpetuated against citizens. The fraud was the claim that tobacco was not the cause of lung cancer, heart disease, and other health problems that had killed so many Americans.


To resolve more than 40 lawsuits brought by the states and hundreds of private suits, the four largest American tobacco companies (Philip Morris Inc., R.J. Reynolds, Brown & Williamson, and Lorillard) lobbied Congress for a legislative remedy.


After over a year of negotiating an agreement, the Master Settlement Agreement (MSA) was approved by Congress for 46 states, as well as the District of Columbia, Puerto Rico, the Virgin Islands, and Guam. The remaining four states – Florida, Minnesota, Texas, and Mississippi – had already entered into their own agreements with the Big Four.


This settlement provided for over $200 billion in relief over 25 years for states who had incurred massive healthcare costs as a direct result of the actions of tobacco companies. Money would be paid out specifically in proportion to cigarette sales in each of those states, which is important to remember.


Additionally, these tobacco conglomerates would fund public education programs designed to reduce youth smoking. It also required tobacco products to display strong warning labels and put a near full-stop on advertising.


In return, states agreed this would put a cap on the costs of litigation with immunity from further state lawsuits. Consumer lawsuits were also neutered by eliminating class-actions and punitive damages.


The Big Four were not the only signatories to this agreement. They were the first, but there were other tobacco companies that quickly joined the settlement to be included in advantageous positions for lower payments than the originals and in lawsuits – benefits that they would have lost by joining later on.

Greed Bonds


Some states were worried about MSA payments, though. They either needed the money up front to fund other projects or felt like tobacco companies weren’t going to be “good for it” at some point down the line. These states sold tobacco bonds to fund their budgetary ambitions.


Tobacco bonds have been sold by nine states. Alaska, California, Iowa, Michigan, New Jersey, New York, Ohio, Rhode Island, West Virginia, as well as Washington, D.C., Puerto Rico, and Guam have all sold bonds against their projected MSA payments.


Bonds function similarly to a long-term loan, with some key differences. In the case of bonds, the money is put up by investors as the lump sum needed by the states. The amount of bonds sold amounted to the expected MSA payments and accrue interest. The expectations were derived from estimations of smoking rate reductions each year.


The biggest difference is that investors are on the hook, not the state, if the MSA payments are too low to cover what is owed. However, anyone unable to pay down their debts can experience a hit to their credit. This makes a state less likely to secure loans in the future from lenders with potentially severe economic impacts.


These bonds, being long-term investments, required assumptions of smoking rate declines many years in the future, so that they were not over-issued when compared to the amounts that the MSA payments would bring. With fewer people purchasing cigarettes, the MSA payments to states become lower, and those payments are what are passed on to bondholders.


Vaping Bans Help Tobacco Bonds


The rise of vaping has accompanied sharper drops in smoking rates than some bonds can handle. Newer bonds like the ones issued by New Jersey assumed that cigarette smoking would not decline by more than 4% each year. They did, and it hurt the state badly, requiring taxpayers to bail them out.


At the same time that vaping began to take hold over tobacco sales in New Jersey, some interesting bills started making rounds from both the legislature and governor’s office making it clear the state needed more smokers to make these bonds stronger.


Shortly after New Jersey issued the new bonds, the legislature passed an indoor vaping ban in 2010 that disallowed customers from trying or using vapor products in vape stores. In 2011, the governor’s office killed anti-smoking programs in schools after budgeting $7.5 million the year before. In 2016, the governor vetoed legislation that would have raised the smoking age to 21. This pattern is being repeated in other states in the form of attacks on flavors following the unrelated illnesses contracted through use of THC cartridges. They’ve managed to get public support through their rally cries of Save The Children™.


Michigan was the first. New York followed closely after and Rhode Island after that. California has also passed flavor bans in the most populated districts, and San Francisco recently banned vapor sales altogether. All of these states share one thing in common – they sell tobacco bonds that are suffering because smoking rates are dropping faster than expected.


Politicians Want Vaping Gone


What we’re witnessing is state politicians trying to destroy the vapor market to protect their precious bond money. The more people switching to vaping products made by companies without MSA requirements, the more those bonds hurt. They need more people to die so that investors can continue to profit from cigarette sales, and all the deaths that they cause.

Cigarettes are the only legal products that, when used as intended, knowingly kill the consumer. Promoting their use is tantamount to corruption. The states are promoting smoking when they kill programs to keep kids off cigarettes and pass legislation specifically drafted to keep people from switching, either by banning flavors or restricting where they can be used.


Politicians at the state and national level continue to engage in these corrupt practices to keep the credit ratings on their tobacco bonds in good standing and keep bond investors happy. At what point is a hedge fund’s investment worth more than a constituent’s life? The answer should be never, but it seems the people we vote for have done exactly that, which makes it blood money.

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